MOODY'S DOWNGRADES RATINGS OF JOHN HANCOCK FINANCIAL SERVICES (SENIOR DEBT TO A3 FROM A2) AND SUBSIDIARIES
US$10.7 Billion of Debt Securities Affected
New York, November 14, 2002 -- Moody's Investors Service has downgraded the debt ratings of John Hancock
Financial Services, Inc. (JHF), its subsidiaries and
related entities. The ratings changed include JHF's senior unsecured
debt rating and issuer rating (senior to A3 from A2), a variety
of ratings related to a JHF shelf registration, the short-term
rating of JHF (to Prime-2 from Prime-1), and the senior
debt rating of John Hancock Canadian Corporation's guaranteed debt.
Moody's has also downgraded the insurance financial strength rating (IFSR)
of John Hancock Life Insurance Company (John Hancock) and its two life
insurance subsidiaries, John Hancock Variable Life Insurance Company
and Investors Partner Life Insurance Company to Aa3 from Aa2. The
note programs supported by funding agreements issued by John Hancock were
also downgraded to Aa3 from Aa2. All the ratings now have a stable
outlook. These rating actions conclude the review of JHF that was
initiated on September 6, 2002.
The rating agency says that these actions are part of an industry-wide
assessment of its current ratings for US life insurers given the increasingly
harsh environment in which the industry is operating.
Moody's says the rating downgrade was based on the reduced earnings capacity
and capital formation at JHF given the impact of the substantial credit
losses from both its investment grade and non-investment grade
bond portfolios and to a lesser degree the lower revenues on fee-based
businesses caused by the depressed equity markets.
Moody's estimates that the company had approximately $360 million
in gross credit related losses in 2001. For the first nine months
of 2002 the company has absorbed $339 million in gross credit losses
with an additional $100 million in losses quite possible in the
fourth quarter. Moody's expects that credit losses are likely to
remain at elevated levels in 2003 given the difficult economic environment.
Compared to many of its peers, JHF has a substantial book of guaranteed
institutional investment products which provides the company little absorption
or cushion from adverse experience with higher-than-expected
credit losses related to these products.
The rating agency noted that John Hancock's statutory net income through
nine months of 2002 was $133 million versus $347 million
for the same period in 2001, down 62%. Statutory capital
at John Hancock declined from $5.3 billion at December 31,
2000 to $4.9 billion at September 30, 2002 and its
capitalization ratio of 9.4% at December 31, 2001
is below the industry average of 11.6% as of the same date.
John Hancock's reduced statutory income and capital levels diminish its
dividend capacity to JHF and, in turn, JHF's fixed charge
coverage and financial flexibility. Given the harsh economic and
capital market environment expected over the next 12-24 months,
the rating agency said it does not expect John Hancock's capital growth
to rebound to historical levels.
Moody's also noted the downgrade was based on actions recently taken and
expected to be taken in the future by John Hancock and JHF as a recently
demutualized entity. The rating agency believes that JHF is under
considerable pressure to engage in activities that are intended to increase
shareholder value -- activities that the company would probably
not have considered under its previous mutual company structure.
Such activities include, but are not limited to, equity repurchase
programs, increased use of debt leverage, sale of appreciated
assets in order to harvest embedded capital gains, and securitization
and/or reinsurance transactions related to the closed block.
The focus of many of these transactions would be an effort to improve
JHF's reported return on equity. But Moody's believes that these
actions, especially in combination, would reduce the company's
overall financial flexibility and creditworthiness. Since the company
demutualized in early 2000, JHF has repurchased approximately 29
million shares for about $1 billion, resulting in the company's
shareholders' equity (ex FAS 115) remaining almost unchanged at $5.8
billion since December 31, 2000.
Long-term debt to capital has increased from 8.7%
as of December 31, 2000 to 18.9% as of September 30,
2002. While the company has suspended shareholder dividends from
John Hancock for the time being to help restore the company's reduced
statutory capital position, this action also reduces JHF's financial
flexibility. Moody's does not expect the financial profile of John
Hancock to return to its previous historic levels given the shareholder
pressures under which the company operates.
Moody's believes that JHF continues to benefit from the company's favorable
name recognition, revenue source diversification, good capitalization,
and its large and stable base of traditional life insurance policies.
It also benefits from strong positions in the individual life, long-term
care, asset accumulation, and investment management markets.
The following ratings have been downgraded:
John Hancock Financial Services, Inc.: Senior debt
to A3 from A2; Issuer rating to A3 from A2; Subordinated debt
to (P)Baa1 from (P)A3; Junior subordinated to (P)Baa1 from (P)A3;
Preferred stock to (P)Baa2 from (P)Baa1; and commercial paper rating
to Prime-2 from Prime-1.
John Hancock Canadian Corporation: senior debt to A3 from A2.
John Hancock Capital Trust I: preferred stock to (P)Baa1 from (P)A3.
John Hancock Capital Trust II: preferred stock at to (P)Baa1 from
John Hancock Global Funding II: backed debt to Aa3 from Aa2.
John Hancock Life Insurance Company: insurance financial strength
rating to Aa3 from Aa2; senior debt rating to A1 from Aa3 (including
SignatureNotes); and surplus notes to A2 from A1.
John Hancock Variable Life Insurance Company: insurance financial
strength rating to Aa3 from Aa2.
Investors Partner Life Insurance Company: insurance financial strength
rating to Aa3 from Aa2.
The following rating has been confirmed:
Maritime Life Assurance Company: insurance financial strength rating
JHFS is an insurance and investment management organization headquartered
in Boston, Massachusetts. JHFS had approximately $94
billion in GAAP assets and $6.1 billion in shareholders'
equity as of September 30, 2002.
For more information, please visit our website at www.moodys.com/insurance.
Life Insurance Group
Moody's Investors Service
VP - Senior Credit Officer
Life Insurance Group
Moody's Investors Service